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CHAPTER 1 - Accounting Process &

Working Paper Preparation


Exercises: Indicate your answer by encircling the letter that contains your choice in each
of the following questions.

1. One is using periodic inventory system. For the year, its total purchases amounted to
P250,000. Its unsold merchandise at the end of the year has a cost of P5,000 which is
80% of its beginning inventory. One’s cost of sale is
a. P 250,000 b. P 251,250 c. P 249,000 d. P 248,750

2. Two’s purchase per purchase invoice is P150,000. The purchase discount is 2/10, n/30.
Freight is P500, FOB shipping point collect. The net purchase amounts under net
method is
a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500

3. Using the information in Item 2, the amount paid by the buyer is


a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500

4. The purchase invoice shows the amount of P250,000, 2/10, 1/20, n/30; FOB destination
collect, P200. If the account is paid 15 days after the invoice date, the net payment
should be
a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800

5. Using the information in Item 4, the net purchase is


a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800

6. Three purchased merchandise for P5,000 and paid P200 for freight, FOB destination
collect. The merchandise was sold at 120% of cost. The gross profit is
a. P 1,000 b. P 1,040 c. P 6,000 d. P 6,240

7. The total purchase is P1,176, net of 2% cash discount. Unsold portion of purchase is
P176. The sale is at mark-up of 10%. The gross profit is
a. P 117.60 b. P 88.24 c. P 115.25 d. P 100.00

8. The term of a P300,000 purchase is 2/20, n/60, FOB shipping point prepaid, P300. If
the account is paid on the 25th day from the invoice date, the total payment would be
a. P 294,000 b. P 299,700 c. P 294,300 d. P 300,300

9. Four paid freight for P200 on its purchase on account from Five, FOB shipping point. The
journal entry in both books of Four and Five would be
Books of Four Books of Five
a. Freight-out 200 Freight-in 200
Cash 200 Accounts payable 200
b. Freight-in 200 No entry
Accounts receivable 200
c. Freight-in 200 No entry
Cash 200
d. Freight-in 200 Freight-out 200
Cash 200 Accounts receivable 200

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10. Six sold merchandise at list price of P250,000; 10; 5; n/30. Part of the sale amounting
to P10,000 was returned due to defect. The amount to be collected by Six is
a. P 205,200 b. P 203,750 c. P 204,000 d. P 195,200

11. Amar Company received P96,000 on April 1, 2002 for one year’s rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2002
adjusting entry is
a. Debit rent revenue and credit unearned rent revenue, P24,000.
b. Debit rent revenue and credit unearned rent revenue, P72,000.
c. Debit unearned rent revenue and credit rent revenue, P24,000.
d. Debit unearned rent revenue and credit rent revenue, P72,000.

12. Andoy Company paid P72,000 on June 1, 2002 for a two-year insurance policy and
recorded the entire amount as insurance expense. The December 31, 2002 adjusting
entry is
a. Debit insurance expense and credit prepaid insurance, P21,000.
b. Debit insurance expense and credit prepaid insurance, P51,000.
c. Debit prepaid insurance and credit insurance expense, P21,000.
d. Debit prepaid insurance and credit insurance expense, P51,000.

13. Antipuesto Company purchase equipment on November 1, 2002 and gave a 12-month,
9% note with a face value of P480,000. The December 31, 2002 adjusting entry is
a. Debit interest expense and credit interest payable, P7,200.
b. Debit interest expense and credit interest payable, P10,800.
c. Debit interest expense and credit cash, P7,200.
d. Debit interest expense and credit interest payable, P43,200.

14. On December 31, 2002, Asilo Company’s bookkeeper made an adjusting entry debiting
supplies expense and credit supplies inventory for P12,600. The supplies inventory
accounts had a P15,300 debit balance on December 31, 2001. The December 31, 2002
balance sheet showed supplies inventory of P11,400. Only one purchase of supplies was
made during the month, on account. The entry for that purchase was
a. Debit supplies inventory and credit cash, P8,700.
b. Debit supplies expense and credit accounts payable, P8,700.
c. Debit supplies inventory and credit accounts payable, P8,700.
d. Debit supplies inventory and credit accounts payable, P16,500.

15. Astillo Company loaned P300,000 to another company on December 1, 2002 and
received a 3-month, 15%, interest-bearing note with a face value of P300,000. What
adjusting entry should Astillo Company make on December 31, 2002?
a. Debit interest receivable and credit interest income, P7,500.
b. Debit cash and credit interest income, P3,750.
c. Debit interest receivable and credit interest income, P3,750.
d. Debit cash and credit interest receivable, P7,500.
.
16. The supplies inventory account balance at the beginning of the period was P66,000.
Supplies totaling P128,250 were purchased during the period and debited to supplies
inventory. A physical count shows P38,250 of supplies inventory at the end of the
period. The year-end adjusting entry is
a. Debit supplies inventory and credit supplies expense, P90,000.
b. Debit supplies expense and credit supplies inventory, P128,250.
c. Debit supplies inventory and credit supplies expense, P156,000.
d. Debit supplies expense and credit supplies inventory, P156,000.

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17. At the end of 2002, Avila Company made four adjusting entries for the following items:
(1) depreciation expense, P35,000; (2) expired insurance, P2,200 (originally recorded as
prepaid insurance); (3) interest payable, P9,000; and (4) rental revenue receivable,
P10,000.

In the normal situation, to facilitate subsequent entries, the adjusting entry or entries
that may be reversed is/are
a. Entry 1 c. Entries 3 and 4
b. Entry 4 d. Entries 2, 3, and 4

18. Bagaipo Company reported an allowance for doubtful accounts of P12,000 (credit) at
December 31, 2002 before performing an aging of accounts receivable. As a result of
the aging, Bagaipo Company determined that an estimated P20,000 of the December
31, 2002 accounts receivable would prove uncollectible. The adjusting entry at
December 31, 2002 would be
a. Doubtful accounts expense 8,000
Allowance for doubtful accounts 8,000
b. Doubtful accounts expense 20,000
Accounts receivable 20,000
c. Allowance for doubtful accounts 8,000
Doubtful accounts expense 8,000
d. Doubtful accounts expense 8,000
Interest revenue 8,000

19. Assuming that the company does not reverse the adjusting entries, what should be
made on April 1, 200 when the annual interest payment is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.

20. Using the data of No. 19, but assuming that the company does reverse its adjusting
entries, what entry should be made on April 1, 2003 when the annual interest payment
is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.

Answer:
1. b 2. b 3. a 4. c 5. b 6. a 7. d 8. d 9. c 10. a
11.a 12.d 13.a 14.c 15.c 16.d 17.c 18.a 19.c 20.d

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Problem 1
The following is the post-closing trial balance of Abagon Shop dated February 1, 2006:

Debit Credit
Cash 120,000
Accounts Receivable 280,000
Allowance for doubtful accounts 2,800
Unused shop supplies 800
Shop Equipment 240,000
Accumulated depreciation - shop 48,000
equipment
Accounts payable 88,800
Notes payable 100,000
Accrued interest payable 1,200
Abagon, Capital 400,000
Total 640,800 640,800

For the month of February, the following are the transactions of Abagon Shop.

1. Abagon withdrew P100,000 cash from the business for her personal use.
2. Paid P12,000 insurance premium.
3. Paid P24,000 rent.
4. Total service rendered to various customers, P140,000, 40% of total sales are on cash
basis and the balance on open account.
5. Received promissory note from customer to replace P40,000 accounts receivable.
6. Collected in cash P164,000 of accounts receivable.
7. Paid the notes payable of P100,000 plus the P2,400 interest.
8. Purchased P2,400 shop supplies on cash basis.
9. Paid salaries, P24,000.

At the end of the month, the following information are available to effect adjustments.

a. The insurance in number 2 for P12,000 is applicable for six months starting February.
b. The rent of P24,000 paid in number 3 is for 3 months, starting February.
c. The note receivable is number 5 is earning 12% interest per year. The note is dated
February 1, and is due on April 30.
d. Bad debts expense is estimated at 2% of accounts receivable balance.
e. The annual depreciation is P48,000.
f. The unused supplies balance is P1,000.

Questions
1. Cash at end of February is:
a. P 103,200 b. P 85,200 c. P 75,200 d. P 72,800

2. Net Realizable value of Accounts Receivable at end of February is


a. P 156,800 b. P 157,200 c. P 196,800 d. P 197,200

3. Unused shop supplies at end of February is


a. P 1,800 b. P 1,000 c. P 800 d. P 200

4. Net book value of Shop Equipment at end of February is


a. P 188,000 b. P 189,000 c. P 184,000 d. P 144,000

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5. Accounts Payable at end of February is
a. P 128,800 b. P 88,800 c. P 86,400 d. P 48,800

6. Notes Payable at end of February is


a. P 100,000 b. P 102,400 c. P 97,600 d. P 0

7. Abagon Capital, net of drawing at end of February is


a. P 398,600 b. P 397,400 c. P 397,800 d. P 388,600
8. Net income of the company at end of February is
a. P 98,600 b. P 97,400 c. P 97,800 d. P 88,600

9. Total Revenue of the company at end of February is


a. P 142,800 b. P 142,400 c. P 140,400 d. P 140,000

10. Total Expenses of the Company at end of February is


a. P 52,600 b. P 41,800 c. P 41,400 d. P 41,000

Solution
1 Abagon, drawing 100,000
Cash 100,000
2 Insurance expense 12,000
Cash 12,000
3 Rent expense 24,000
Cash 24,000
4 Cash 56,000
Accounts receivable 84,000
Revenue 140,000
5 Notes receivable 40,000
Accounts receivable 40,000
6 Cash 164,000
Accounts receivable 164,000
7 Notes payable 100,000
Interest expense 2,400
Cash 102,400
8 Supplies expense 2,400
Cash 2,400
9 Salaries 24,000
Cash 24,000

Adjusting Entry:

a Prepaid Insurance 10,000


Insurance expense 10,000
b Prepaid rent 16,000
Rent expense 16,000
c Interest receivable 400
Interest income 400
(P40,000 x 12% x 1/12)
d Bad debts 400
Allowance for bad debts 400
e Depreciation 4,000
Accum. depreciation 4,000
f Unused supplies 1,000
Supplies expense 1,000
Supplies expense 800
Unused supplies 800
g Accrued interest payable 1,200
Interest expense 1,200
To reverse the beg. accrued interest
payable

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TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET

75,20
CASH 0 75,200
ACCNTS RECEIV 160,000 160,000
ALLOW. FOR BD 2,800 400 3,200
NOTES RECEIV 40,000 40,000
UNUSED SUPPLIES 800 1,000 800 1,000
SHOP EQUIPMENT 240,000 240,000
ACCUM. DEPN 48,000 4,000 52,000
ACCOUNTS PAY 88,800 88,800
NOTES PAYABLE - -
ACC. INT. PAY 1,200 1,200 -
ABAGON, DRAWING 100,000 100,000
ABAGON, CAPITAL 400,000 400,000
REVENUE 140,000 140,000
INSURANCE EXP 12,000 10,000 2,000
RENT EXPENSE 24,000 16,000 8,000
SUPPLIES EXP 2,400 800 1,000 2,200
SALARIES 24,000 24,000
INTEREST EXP 2,400 _______ 1,200 1,200
680,800 680,800
PREPAID INS 10,000 10,000
PREPAID RENT 16,000 16,000
INTEREST RECEI 400 400
INTEREST INC 400 400
BAD DEBTS 400 400
DEPRECIATION 4,000 _______ 4,000 ________
33,800 33,800 41,800 140,400
NET INCOME 98,600 ________ _______ 98,600
140,400 140,400 642,600 642,600

Answer:
1. C 2. A 3. B 4. A 5. B 5. D 8. A 9. A 9. C 10. B

Problem 2
The following selected transactions were completed during Year 1 of operations by Vicar
Corporation:

a. Sold of its 20,000 shares of its own common stock, par P1 per share, for P15 per
share and received cash in full.

b. Borrowed P100,000 cash on 12%, one-year note, interest payable at maturity on


April 30, Year 2.

c. Purchased equipment for use in operating the business at a net cash cost of
P164,000; paid in full.

d. Purchased merchandise for resale at cash cost of P140,000; paid cash. Assume a
periodic inventory system; therefore, debit Purchases.

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e. Purchased merchandise for resale on credit terms of 2/10, n/60. The merchandise
will cost P9,800 if paid within 10 days; after 10 days, the payment will be P10,000. The
company always takes the discount; therefore, such purchased are recorded at net of
the discount.

f. Sold merchandise for P180,000; collected P165,000 cash, and the balance is due in
one month.

g. Paid P30,000 cash for operating expenses.

h. Paid ¾ of the balance for the merchandise purchased in (e) within 10 days; the
balance remains unpaid.

i. Collected 50% of the balance due on the sale in (f); the remaining balance is
uncollected.

j. Paid cash for an insurance premium, P600; the premium was for two years’ coverage
(debit Prepaid insurance).

k. Purchased a tract of land for a future building for company operations, P63,000 cash.

l. Paid damages to a customer who was injured on the company premises, P10,000
cash.

Questions
Using the unadjusted trial balance, answer the following:

1. Cash balance is:


a. P 157,550 b. P 157,400 c. P 157,250 d. P 149,900

2. Accounts receivable balance is:


a. P 15,000 b. P 10,000 c. P 7,700 d. P 7,500

3. Prepaid insurance balance is:


a. P 600 b. P 400 c. P 300 d. P 200

4. Land account balance is:


a. P 227,000 b. P 164,000 c. P 101,000 d. P 63,000

5. Equipment account balance is:


a. P 227,000 b. P 164,000 c. P 101,000 d. P 63,000

6. Accounts payable balance is:


a. P 2,650 b. P 2,500 c. P 2,450 d. P 2,150

7. Notes payable balance is:


a. P 112,000 b. P 109,000 c. P 100,000 d. P 88,000

8. Common stock balance is:


a. P 300,000 b. P 280,000 c. P 200,000 d. P 20,000

1. Premium on capital stock balance is:


a. P 300,000 b. P 280,000 c. P 200,000 d. P 20,000

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2. Sales balance is:
a. P 180,000 b. P 160,000 c. P 100,000 d. P 80,000
3. Purchases balance is:
a. P 149,800 b. P 149,600 c. P 150,000 d. P 150,200

4. Operating expenses and other expenses is:


a. P 49,800 b. P 40,200 c. P 40,000 d. P 38,800
Solution

(a) Cash 300,000


Common stock 20,000
Premium on capital stock 280,000
(b) Cash 100,000
Notes payable 100,000
(c) Equipment 164,000
Cash 164,000
(d) Purchases 140,000
Cash 140,000
(e) Purchases 9,800
Accounts payable 9,800
(f) Cash 165,000
Accounts receivable 15,000
Sales 180,000
(g) Operating expenses 30,000
Cash 30,000
(h) Purchase disc. lost 200
Accounts payable 200
Accounts payable 7,500
Cash 7,500
(i) Cash 7,500
Accounts receivable 7,500
(j) Prepaid insurance 600
Cash 600
(k) Land 63,000
Cash 63,000
(l) Loss on damages 10,000
Cash 10,000

Cash 157,400
Accounts receivable 7,500
Prepaid insurance 600
Land 63,000
Equipment 164,000
Accounts payable 2,500
Notes payable 100,000
Common stock 20,000
Premium on capital stock 280,000
Sales 180,000
Purchases 149,800
Operating expenses 30,000
Purchase disc. lost 200
Loss on damages 10,000 _______
Total 582,500 582,500

ANSWER
1. b 2. d 3. a 4. d 5. b 6. b 7. c 8. d 9. b 10. a
11. a 12. b

Problem 3

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The post-closing trial balance of the general ledger of Wilson Corporation at December 31,
20I, reflected the following:

Account Debit Credit


Cash 27,000
Accounts receivable 21,000
Allowance for doubtful accounts 1,000
Inventory (perpetual inventory system) 35,000
Prepaid insurance (20 mos. remaining) 900
Equipment (20-year life, no salvage value) 50,000
Accumulated depreciation 22,500
Accounts payable 7,500
Wages payable -
Income taxes payable (for 20I) 4,000
Common stock, par P1 80,000
Retained earnings 18,900
Sales revenue -
Cost of goods sold -
Operating expenses -
Income tax expense -
Income summary -___ ______
133,900 133,900
* Ending inventory, P45,000 (at 12/31/20J)

The following transactions occurred during 20J in the order given (use the number at the
left to indicate the date):

1. Sales revenue at P30,000, of which P10,000 was on credit; cost provided by perpetual
inventory record, P19,500.
2. Collected P17,000 on accounts receivable.
3. Paid income taxes payable (20I), P4,000.
4. Purchased merchandise, P40,000, of which P8,000 was on credit.
5. Paid accounts payable, P6,000.
6. Sales revenue of P72,000 (in cash); cost, P46,800.
7. Paid operating expenses, P19,000.
8. On January 1, 20J, sold and issued 1,000 shares of common stock, par P1, for P1,000
cash.
9. Purchased merchandise, P100,000, of which P27,000 was on credit.
10. Sales revenue of P98,000, of which P30,000 was on credit; cost P63,700.
11. Collected cash on accounts receivable, P26,000.
5. Paid cash on accounts payable, P28,000.
6. Paid various operating expenses in cash, P18,000.

Assume a bad debt rate of ½% of credit sales for the period and a 32% income tax rate. At
December 31, 20J, accrued wages were P300. Use straight-line depreciation.

Questions
1. Cash at December 31, 20J is:
a. P 51,000 b. P 50,000 c. P 45,000 d. P 41,000

2. Accounts receivable at December 31, 20J is:


a. P 18,000 b. P 16,800 c. P 16,000 d. P 15,800

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3. Inventory at December 31, 20J is:
a. P 64,500 b. P 45,000 c. P 35,000 d. P 32,500

4. Prepaid insurance at December 31, 20J is:


a. P 360.00 b. P 562.50 c. P 900 d. P 540

5. Equipment at December 31, 20J is:


a. P 95,000 b. P 60,000 c. P 50,900 d. P 50,000

6. Accumulated depreciation at December 31, 20J is:


a. P 30,000 b. P 25,000 c. P 22,500 d. P 20,000

7. Accounts payable at December 31, 20J is:


a. P 15,000 b. P 14,500 c. P 10,500 d. P 8,500

8. Income taxes payable at December 31, 20J is:


a. P 9,600 b. P 9,427 c. P 5,651 d. P 4,000

9. Retained earnings at December 31, 20J is:


a. P 39,300 b. P 38,933 c. P 30,909 d. P 27,400

10. Cost of goods sold at December 31, 20J is:


a. P 110,500 b. P 128,000 c. P 130,000 d. P 132,000

11. Net income before taxes at December 20J is:


a. P 30,000 b. P 29,460 c. P 17,660 d. P 12,500
Solution
(1) Cash 20,000
Accounts receivable 10,000
Sales 30,000
Cost of sales 19,500
Inventory 19,500
(2) Cash 17,000
Accounts receivable 17,000
(3) Income taxes payable 4,000
Cash 4,000
(4) Inventory 40,000
Cash 32,000
Accounts payable 8,000
(5) Accounts payable 6,000
Cash 6,000
(6) Cash 72,000
Sales 72,000
Cost of sales 46,800
Inventory 46,800
(7) Operating expenses 19,000
Cash 19,000
(8) Cash 1,000
Common stock 1,000
(9) Inventory 100,000
Cash 73,000
Accounts payable 27,000
(10) Cash 68,000
Accounts receivable 30,000
Sales 98,000
Cost of sales 63,700
Inventory 63,700
(11) Cash 26,000
Accounts receivable 26,000

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(12) Accounts payable 28,000
Cash 28,000
(13) Operating expenses 18,000
Cash 18,000

Adjusting Entry:
(a) Operating expenses (ins. Exp) 540
Prepaid insurance 540
(P900 x 12/20)
(b) Operating expenses (depreciation) 2,500
Accumulated depreciation 2,500
(c) Operating expenses (bad debts) 200
Allowance for bad debts 200
(d) Operating expenses 300
Wages payable 300

FINANCIAL STATEMENTS
Cash 51,000
Accounts receivable 18,000
Allowance for bad debts (1,200)
Inventory 45,000
Prepaid insurance 360
Equipment 50,000
Accumulated depreciation (25,000)
Total Assets 138,160

Accounts payable 8,500


Wages payable 300
Income taxes payable 9,427
Common stock 81,000
Retained earnings 38,933
Total Liability/SHE 138,160

Sales revenue 200,000


Cost of sales 130,000
Gross profit 70,000
Operating expenses 40,540
Income before taxes 29,460
Income taxes expense 9,427
Net income 20,033
Retained earnings – beg 18,900
Retained earnings – end 38,933

Answer:
1. a 2. b 3. b 4. a 5. d 6. b 7. d 8. b 9. b 10.c 11.b

Problem 4
The account of PEQUIT COMPANY as at December 1, 2006 are listed below:

Cash 214,000
Accounts receivable 338,000
Marketable securities 426,000
Office supplies 31,000
Prepaid insurance 48,000
Land 370,000
Building 900,000
Accum. depreciation – bldg 250,000
Equipment 800,000
Accum. depreciation – equip. 200,000
Accounts payable 172,000
Mortgage payable 1,200,000
Capital _______ 1,305,000

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3,127,000 3,127,000

The following transactions occurred during the month of December 2006:

Dec. 1 Settled the accounts payable of P115,000 less 2% discount.


3 Collected the accounts receivable of P180,000 less 3% discount.
4 Sold merchandise on account to PAPACOY SUPPLIES, P210,000. Terms: FOB
destination, 3/10, n/30. PAPACOY SUPPLIES paid the freight for P3,000.
5 Received returns from PAPACOY SUPPLIES, P25,000.
7 Purchased merchandise from OSTIQUE PRODUCTS, P232,000. Terms: FOB
shipping point, 2/10, n/30. PEQUIT COMPANY paid P2,000 for the
transportation cost.
9 Returned goods to OSTIQUE PRODUCTS, P12,000 acquired on December 7.
10 Paid interest on mortgage payable, P8,000.
11 Received payment from PAPACOY SUPPLIES for the amount due.
12 Sold merchandise to OANI SHOPPERS, P330,000. Terms: FOB shipping point,
3/10, n/30.
18 Received payment from OANI SHOPPERS from the December 12 sales.
19 Sold merchandise to NAVALES SHOP, P242,000. Term: FOB shipping point,
3/10, n/30. PEQUIT COMPANY paid P5,000 for the freight.
20 Paid P9,000 for representation expense.
29 Received from NAVALES SHOP returned merchandise in the amount of
P18,000 from the December 19 sales.
30 The owner, Genevieve, withdraw merchandise for personal use. Cost –
P20,000; Selling price – P30,000.

Additional information
1. Salaries in the amount of P73,000 have accrued on December 31.
2. Insurance coverage with premium of P2,000 has expired at month-end.
3. Depreciation on the building and on the equipment for the month amounted to
P3,000 and P4,500, respectively.
4. Office supplies on hand at month-end amounted to P7,000.
5. A count of the inventory amounted to P453,000 on December 31, 2006.

Questions
1. Cash balance at December 31, 2006 is:
a. P 773,750 b. P 772,700 c. P 748,450 d. P 727,700

2. Accounts receivable at December 31, 2006 is:


a. P 412,000 b. P 405,000 c. P 387,000 d. P 362,000

3. Inventory at December 31, 2006 is:


a. P 625,700 b. P 453,000 c. P 426,000 d. P 212,000

4. Office supplies at December 31, 2006 is:


a. P 7,000 b. P 10,000 c. P 24,000 d. P 31,000

5. Net carrying value of Fixed Assets at December 31, 2006 is:


a. P 1,980,000 b. P 1,620,000 c. P 1,612,500 d. P 1,242,500

6. Total assets at December 31, 2006 is:


a. P 3,253,950 b. P 3,250,950 c. P 3,203,950 d. P 3,153,950

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7. Accounts payable at December 31, 2006 is:
a. P 289,000 b. P 279,000 c. P 277,000 d. P 257,000

8. Accrued expenses at December 31, 2006 is:


a. P 97,000 b. P 73,000 c. P 24,000 d. P 9,000

9. Net sales at December 31, 2006 is:


a. P 782,000 b. P 718,950 c. P 718,240 d. P 718,150

10. Total purchases at December 31, 2006 is:


a. P 232,000 b. P 212,000 c. P 199,700 d. P 197,700

11. Operating expenses at December 31, 2006 is:


a. P 126,500 b. P 118,500 c. P 109,500 d. P 101,500

12. Net income at December 31, 2006 is:


a. P 482,800 b. P 426,950 c. P 419,040 d. P 418,950

13. Capital balance at December 1, 2006 is:


a. P 1,704,040 b. P 1,703,950 c. P 1,305,000 d. P 1,285,000

14. Capital balance at December 31, 2006 is:


a. P 1,704,040 b. P 1,703,950 c. P 1,305,000 d. P 1,285,000

15. Total liabilities and capital at December 31, 2006 is:


a. P 3,253,950 b. P 3,250,950 c. P 3,203,950 d. P 3,153,950

Solution

Dec 1 Accounts payable 115,000 Dec 10 Interest expense 8,000


Cash 112,700 Cash 8,000
Purchases (discount) 2,300
Dec 11 Cash 176,450
Dec 3 Cash 174,600 Sales (discount) 5,550
Sales (discount) 5,400 Accounts receivable 182,000
Accounts receivable 180,000

Dec 12 Accounts receivable 330,000


Dec 4 Accounts receivable 207,000 Sales 330,000
Transportation exp 3,000
Sales 210,000 Dec 18 Cash 320,100
Sales (discount) 9.900
Dec 5 Sales (returns) 25,000 Accounts receivable 330,000
Accounts receivable 25,000
Dec 19 Accounts receivable 247,000
Dec 7 Purchases 232,000 Cash 5,000
Freight-in 2,000 Sales 242,000
Cash 2,000
Accounts payable 232,000 Dec 20 Representation exp 9,000
Cash 9,000
Dec 9 Accounts payable 12,000
Purchases (returns) 12,000 Dec 29Sales (returns) 18,000
Accounts receivable 18,000

Dec 30 Drawing 20,000


Purchases 20,000
Adjusting entry:

13
1. Salaries expense 73,000
Accrued salaries 73,000

2. Insurance expense 2,000


Prepaid insurance 2,000

3. Depreciation 7,500
Accum. Dep’n – bldg 3,000
Accum. Dep’n – equip 4,500

4. Supplies expense 24,000


Office supplies 24,000

5. Inventory – BS 453,000
Inventory – IS 453,000

ANSWER:
1. C 2. C 3. B 4. A 5. C 6. A 7. C 8. B 9. D 10. C
11. A 12. D 13. C 14. B 15. A

Problem 5
The Righter Shoe Store Company prepares monthly financial statements for its bank. The
November 30 and December 31, 2006, trial balances contained the following information:

Nov. 30 Dec. 31
Dr. Cr. Dr. Cr.
Supplies 1,000 3,000
Prepaid insurance 6,000 4,250
Wages payable 10,000 15,000
Unearned rent revenue 2,000 1,000

The following information also is known:

a. The December income statement (accrual basis) reported P2,000 in supplies


expense.
b. No insurance payments were made in December.
c. P10,000 was paid to employees during December for wages.
d. On November 1, 2006, a tenant paid Righter P3,000 in advance rent for the
period November through January. Unearned revenue was credited.

Questions
1. What was the cost of supplies purchased during December?
a. P 1,000 b. P 2,000 c. P 3,000 d. P 4,000

2. What was the adjusting entry recorded at the end of December for prepaid
insurance?
a. Prepaid insurance 4,250
Insurance expense 4,250
b. Insurance expense 4,250
Prepaid insurance 4,250
c. Insurance expense 1,750
Prepaid insurance 1,750
d. No adjusting entry

3. What was the adjusting entry recorded at the end of December for
accrued wages?
a. Wages expense 15,000

14
Wages payable 15,000
b. Wages expense 10,000
Wages payable 10,000
c. Wages expense 5,000
Wages payable 5,000
d. No adjusting entry

4. What was the amount of rent revenue earned in December?


a. P 1,000 b. P 2,000 c. P 3,000 d. P 4,000

5. What adjusting entry was recorded at the end of December for unearned
rent?
a. Unearned rent rev. 3,000
Rent revenue 3,000
b. Rent revenue 2,000
Unearned rent rev. 2,000
c. Unearned rent revenue 1,000
Rent revenue 1,000
d. Unearned rent revenue 2,000
Rent revenue 2,000

Solution
1. D
Supplies on Hand
Beg. Bal 1,000 Adjustment 2,000
Purchases 4,000 *
Ending bal. 3,000
* squeezed figure
2. C 3. A 4. A 5. C

Problem 6
The trial balance of ANN CO., prior to the closing of its account for the fiscal year ended
September 30, 2006 follows:

Cash P22,500
Accounts receivable 93,600
Allowance for doubtful accounts P 3,190
Note receivable 15,500
Merchandise inventory, 9/30/02 56,890
Furniture and equipment 61,800
Accumulated depreciation 18,750
Goodwill 30,000
Accounts payable 53,600
Notes payable 10,000
Capital Stock 100,000
Retained Earnings 55,250
Sales 372,000
Sales return and allowances 4,760
Purchases 215,930
Purchase return and allowances 3,650
Advertising 9,610
Sales salaries 28,850
Commission expense 15,200
Miscellaneous expense 2,990

15
Rent expense 13,000
Office salaries 19,720
Light and Water 1,500
Insurance expense 1,080
Taxes and licenses 4,780
General expense 16,340
Interest expense 4,120
Interest income 910

Your examination of the company’s account has the need for adjustments based on the
following items:

a. The cash account included a customer’s check for P1,500 deposited on


September 25, 2006 but returned by the bank on September 29, 2006 for lack of
countersignature. No entry was made for the returned check.

b. Unrecorded bank charge for September 2006, P500

c. The allowance for doubtful accounts should be adjusted to 5% of the


outstanding accounts receivable balance on September 30, 2006.

d. A physical inventory of merchandise taken at the end of the fiscal year 2006
amounted to P60,120.

e. Goods received on consignment, still unsold costing P2,000 were included in


the physical inventory.

f. The merchandise inventory on September 30, were correctly stated.

g. Depreciation of furniture and equipment at 10% annually has not been


recognized.

h. Accrued salesmen’s salaries not recorded P5,000

i. An insurance policy was taken on the inventory and equipment on March 1,


2006 with the annual insurance premium of P1,080 paid on that date.

j. Rent expense account considered of rent for the store and office space for
thirteen months starting August 1, 2006.

Based on the aforementioned data, answer the following questions;

1. The adjusting entry on item A is


a. Cash 1,500
Accounts receivable 1,500
b. Accounts payable 1,500
Cash 1,500
c. Accounts receivable 1,500
Cash 1,500
d. No adjustment

2. The adjusting entry on item B is


a. Cash 500

16
Accounts receivable 500
b. Cash 500
General expenses 500
c. General Expenses 500
Cash 500
d. No adjustment

3. The adjusting entry on item C is


a. Accounts receivable 4,680
Allowance for Doubtful Accounts 4,680
b. Doubtful Accounts 1,565
Allowance for Doubtful Accounts 1,565
c. Allowance for Doubtful Accounts 1,490
Doubtful Accounts 1,490
d. Doubtful Accounts 1,490
Allowance for Doubtful Accounts 1,490

4. The adjusting entry on item D is


a. Merchandise Inv. 60,120
Income Summary 60,120
b. Merchandise Inv. 60,120
Purchases 60,120
c. Income summary 60,120
Merchandise inventory 60,120
d. No adjustment

5. The adjusting entry on item E


a. Income summary 2,000
Merchandise Inv. 2,000
b. Sales 2,000
Merchandise Inv. 2,000
c. Merchandise inventory 2,000
Income summary 2,000
d. No adjustment

6. The adjusting entry on item F is


a. Merchandise Inv. 56,890
Income summary 56,890
b. Merchandise Inv. 56,890
Purchases 56,890
c. Income summary 56,890
Merchandise inventory 56,890
d. No adjustment

7. The adjusting entry on item G is


a. Depreciation Exp. 6,180
Accumulated Depreciation 6,180
b. Accumulated Depreciation 6,180
Furniture and Equipment 6,180
c. Accumulated depreciation 6,180
Depreciation expense 6,180
d. No adjustment

17
8. The adjusting entry on item H is
a. Accrued Salaries Expense 5,000
Sales salaries 5,000
b. Accrued salaries exp. 5,000
Office salaries 5,000
c. Office salaries 5,000
Depreciation expense 5,000
d. Sales salaries 5,000
Accrued salaries expense 5,000

9. The adjusting entry on item I is


a. Insurance Exp. 630
Prepaid insurance 630
b. Prepaid insurance 630
insurance exp. 630
c. Insurance expense 450
Prepaid insurance 450
d. Prepaid insurance 450
Insurance expense 450

10. The adjusting entry on item J is


a. Rent expense 11,000
Prepaid rent 11,000
b. Prepaid rent 2,000
Rent expense 2,000
c. Prepaid rent 11,000
Rent expense 11,000
d. Rent expense 2,000
Prepaid rent 2,000

After making the adjustments compute the following:

11. Cash
a. P24,000 b. P21,000 c. P20,500 d. P20,000

12. Net realizable value of accounts receivable


a. P90,410 b. P90,345 c. P88,920 d. P88,845

13. Merchandise inventory, September 30, 2006


a. P60,120 b. P56,890 c. P62,120 d. P58,120

14. Furniture and Equipment, net of accumulated depreciation


a. P55,620 b. P36,870 c. P36.700 d. 36,890

15. Total assets, September 30, 2006


a. P262,785 b. P250,845 c. P223,850 d. P262,700

16. Cost of goods sold, September 30, 2006


a. P211,050 b. P210,050 c. P212,300 d. P212,280

17. Net income, September 30, 2006 (disregard tax effect)


a. P31,635 b. P31,625 c. P38,935 d. P38,115

18
18. Prepaid insurance
a. P630 b. P450 c. P1,080 d. P600

19. Prepaid rent


a. P11,000 b. P2,000 c. P13,000 d. P10,000

Answer:
1. C 2. C 3. B 4. A 5. A 6. D 7. A 8. D 9. D 10. C
11. C 12. B 13. D 14. B 15. A 16. A 17. D 18. B 19. A

Problem 7
Selected pre-adjustment account balances and adjusting information of NAPPY COMPANY for
the year ended December 31, 2006, are as follows:

Retained earnings, January 1, 2006 440,670


Sales Salaries and Commissions 35,000
Advertising Expense 16,000
Legal Services 2,225
Insurance and Licenses 8,500
Travel Expense – Sales Representative 4,560
Depreciation Expense 10,900
Interest Revenue 700
Utilities expense 6,400
Telephone and Postage Expense 1,475
Supplies inventory 2,180
Miscellaneous Selling Expense 2,200
Dividends 33,000
Dividend Revenue 7,150
Interest expense 4,520
Allowance for bad debts (Cr. Balance) 370
Officers’ Salaries Expense 36,600
Sales 495,200
Sales returns and allowances 11,200
Sales discounts 880
Gain on sales of assets 18,500
Inventory, January 1, 2006 89,700
Inventory, December 31, 2006 20,550
Purchases 173,000
Freight-in 5,525
Accounts Receivable, December 31, 2006 261,000
Shares of common stock outstanding 39,000

Adjusting information:

1. Cost of inventory in the possession of consignee as of December 31, 2006, was not
included in the ending inventory balance, P33,600.

2. After preparing an analysis of aged accounts receivable, a decision was made to increase
the allowance for bad debts to a percentage of the ending account receivable balance to
3%. Accounts totaling P7,480 were written off as uncollectible during the year.

3. Purchase returns and allowances amounting to 6% of purchases (not including freight-


in) were not recorded at year-end.

19
4. Sales commission for the last day of the year had not been accrued. Total sales for the
day, P3,600. Average sales commission as a percent of sales is 3%.
5. No accrual has been made for a freight bill received on January 3, 2007, for goods
received on December 29, 2006, P800.

6. An advertising campaign for P1,818 was initiated November 1, 2006. This amount was
recorded as “prepaid advertising” and should be amortized over a 6-month period. No
amortization was recorded.

7. Freight charges paid on sold merchandise and not passed to the buyer were netted
against sales. Freight charges on sales during 2006 is P4,200.

8. Interest earned but not accrued, P690.

9. Depreciation expense on a new forklift (estimated life is 10 years) purchased for P7,800
on March 1, 2006 had not been recognized. (Assume all equipment will have no salvage
value and the SLM is used. Depreciation is calculated to the nearest month.)

10. A “real” account is debited upon the receipt of supplies. Supplies on hand at year-end is
P1,600.

11. Income tax rate (on all items) is 32%.

Questions
1. Net Sales is
a. P 499,200 b. P 489,300 c. P 488,500 d. P 487,320

2. Purchases net of returns and allowances is


a. P 165,200 b. P 164,000 c. P 162,620 d. P 161,200

3. Freight-in is
a. P 6,325 b. P 5,200 c. P 5,000 d. P 4,125

4. Inventory – 12/31/02 is
a. P 54,700 b. P 54,150 c. P 53,600 d. P 52,200

5. Cost of sales is
a. P 265,440 b. P 205,350 c. P 204,495 d. P 114,795

6. Sales salaries and commission is


a. P 35,108 b. P 35,100 c. P 35,000 d. P 34,700

7. Advertising expense is
a. P 24,696 b. P 16,800 c. P 16,750 d. P 16,606

8. Depreciation expense is
a. P 14,600 b. P 12,500 c. P 12,000 d. P 11,550

9. Supplies expense is
a. P 670 b. P 580 c. P 560 d. P 480

20
10. Doubtful accounts expense is
a. P 7,500 b. P 7,460 c. P 7,300 d. P 7,200

11. Interest revenue is


a. P 1,540 b. P 1,390 c. P 1,300 d. P 1,290

12. Income tax expense is


a. P 58,554 b. P 54,605 c. P 53,722 d. P 53,693

13. Net income is


a. P 115,586 b. P 115,558 c. P 114,159 d. P 104,445
Solution
Per book Adjust ments Per Audit
Sales 495,200 4,200 499,400
Sales ret. And allow. (11,200) (11,200)
Sales discount (880) (880)
483,120 487,320
Cost of Sales
Beginning inventory 89,700 89,700
Purchases 173,000 173,000
Purch. Ret and allow. 10,380 (10,380)
Purch. Discount -
Freight-in 5,525 800 6,325
Total Goods Avail. For Sale 268,225 258,645
Ending inventory 20,550 33,600 54,150
247,675 204,495

Gross Profit 235,445 282,825

Interest revenue 700 690 1,390


Dividends revenue 7,150 7,150
Gain on sale of assets 18,500 18,500

Total Revenue 261,795 309,865

Sales Salaries and Commission 35,000 108 35,108


Advertising Expense 16,000 606 16,606
Legal services 2,225 2,225
Insurance and licenses 8,500 8,500
Travel expense 4,560 4,560
Depreciation expense 10,900 650 11,550
Utilities expense 6,400 6,400
Telephone and postage 1,475 1,475
Misc. selling expense 2,200 2,200
Officers' salaries 36,600 36,600
Interest expense 4,520 4,520
Bad debts 7,460 7,460
Transportation expense 4,200 4,200

21
Supplies expense 580 580
141,984

Income before tax 167,881


Income tax 53,721.92

Net Income 114,159

ANSWER:
1. D 2. C 3. A 4. B 5. C 6. A 7. D 8. D 9. B 10. B
11. B 12. C 13. C

Problem 8
Presented below are unaudited balances of selected accounts of Baluyot Company as at
December 31, 2006 – its first year of operation. During the course of your audit of
Baluyot’s books you obtained additional information affecting these accounts:

Debit Credit
Cash 500,000
Accounts receivable 1,300,000
Allowance for bad debts 8,000
Sales (net) 6,750,000
Accounts payable 600,000
Purchases (net) 4,350,000
Cars and trucks 1,200,000
Machinery and equipment 950,000
Accumulated depreciation 95,000

Additional information:

a. On December 31, 2006, Baluyot recorded and wrote check payments to creditors
amounting to P300,000. A number of checks amounting to P150,000 were mailed on
January 3, 2007.

b. On December 28, 2006, Baluyot purchased and received goods amounting to P100,000,
terms 2/10, n/30. As a policy, Baluyot records purchases in accounts payable at net
amounts. This particular invoice was recorded and paid on January 4, 2007.

c. On December 26, 2006, a supplier authorized Baluyot to return goods shipped and billed
at P80,000 on December 3, 2006. The goods were returned on December 30, 2006.
The supplier’s credit memo was received and recorded on January 5, 2007.

d. Goods amounting to P50,000 were invoiced for the account of Palmes Company and
recorded on January 2, 2007 with terms of net 60 days, FOB shipping point. The goods
were shipped to Palmes on December 30, 2006.

e. The bank returned on December 29, 2006, a customer check for P5,000 marked “No
Sufficient Fund” but no entry was made.

f. Baluyot estimates that allowance for uncollectible accounts should be one and one-half
percent (1½%) of the accounts receivable balance as of year-end. No provision has yet
been made for 2006.

22
g. All the cars and trucks were acquired on May 1, 2006 at a total cost of P1,200,000.
Baluyot estimates the useful life of the cars and trucks at five-years and depreciates
these assets based on 150% declining balance. As a policy, depreciation is computed to
the nearest month and rounded-off to the nearest peso. No depreciation has been
recorded for cars and trucks as at December 31, 2006.

Questions
1. The adjusted amount of Cash is:
a. P 650,000 b. P 645,000 c. P 500,000 d. P 495,000

2. The adjusted amount of Accounts Receivable is:


a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000

3. The adjusted amount of Sales – net is:


a. P 6,840,000 b. P 6,800,000 c. P 6,750,000 d. P 6,700,000

4. The adjusted amount of Purchases – net is:


a. P 4,448,000 b. P 4,368,000 c. P 4,350,000 d. P 4,270,000

5. The adjusted amount of Bad Debts Expense is:


a. P 36,325 b. P 28,325 c. P 20,325 d. P 12,325

6. The adjusted amount of 2006 Depreciation Expense – Machinery and Equipment is:
a. P 95,550 b. P 95,500 c. P 95,417 d. P 95,000

7. The adjusted amount of Accounts payable is:


a. P 818,000 b. P 800,000 c. P 768,000 d. P 600,000
Solution
(a) Cash 150,000
Accounts payable 150,000
(b) Purchases 98,000
Accounts payable 98,000
(c) Accounts payable 80,000
Purchase returns 80,000
(d) Accounts receivable 50,000
Sales 50,000
(e) Accounts receivable 5,000
Cash 5,000
(f) Bad debts 28,325
Allowance for bad debts 28,325
(1,355,000 x 1½% = P 20,325 + P8,000 debit balance of Allowance)
ANSWER:
1. B 2. A 3. B 4. B 5. B 6. D 7. C

Problem 9
The trial balance of TRANQUILAN CORPORATION, prior to the closing of is accounts for the
fiscal year-ended September 30, 2006 follows:
DEBIT CREDIT
Cash 225,000
Accounts receivable 936,000
Allowance for doubtful accounts 31,900
Notes receivable 155,000
Merchandise inventory, Sept. 30, 2005 568,900
Furniture and Equipment 618,000
Acc. Depreciation – Furniture & Equipment 187,500

23
Goodwill 300,000
Accounts payable 536,000
Notes payable 100,000
Capital stock 1,000,000
Retained earnings 552,500
Sales 3,728,200
Sales returns and allowances 47,600
Purchases 2,159,300
Purchase returns and allowances 36,500
Advertising 96,100
Sales salaries 288,500
Commission expense 152,000
Miscellaneous selling expenses 29,900
Rent expense 130,000
Office salaries 197,200
Light and water 15,000
Insurance expense 10,800
Taxes and licenses 47,800
Miscellaneous general expenses 163,400
Interest expense 41,200
Interest income ________ 9,100
6,181,700 6,181,700

Your examination of the company’s accounts had indicated the need for adjustments based
on the following information:

1. The Cash account include a customers’ check for P15,000 deposited on September 25,
2006, but returned by the bank on September 29, 2006 for lack of countersignature. No
entry was made by the company for the return of the check or for its redeposit on
October 5, 2006.

2. The Allowance for Doubtful Accounts should be adjusted to 5% of the customers’


outstanding balances on September 30, 2006.

3. A physical inventory taken of the merchandise stock as of the end of the fiscal year
amounted to P601,200.

4. A purchase of merchandise FOB shipping point, for which goods costing P40,000 were
still in transit on September 30, 2006 was neither taken as a liability nor included in the
inventory on that date.

5. Goods received on consignment, still unsold, were included in the inventory at the
agreed selling price of P24,000.

6. The merchandise inventory at September 30, 2005 was correctly stated.

7. On July 1, 2006, equipment acquired on October 1, 2003 with a book value of P32,000
on September 30, 2005 was sold for P35,000 in cash. The sales proceeds were credited
to the Furniture and Equipment account.

8. Depreciation for the fiscal year 2005-2006 has not been recorded. Depreciation rate
being used is 10% annually.

24
9. An insurance policy was taken on the inventory and equipment on April 1, 2006 with the
annual premium of P10,800 paid on that date.

10. Rent expense account consisted of rent paid for stock and office space for thirteen (13)
months ending October 31, 2006.

11. The 120-day Note Payable of P100,000 bearing interest of 12% was discounted at the
bank on September 1, 2006.

12. The Goodwill account was set-up by a credit to Retained Earnings under a resolution of
the Board of Directors.

Questions
1. Cash for the fiscal year-ended September 30, 2006 is:
a. P 195,000 b. P 210,000 c. P 225,000 d. P 240,000

2. Accounts receivable for the fiscal year-ended September 30, 2006 is:
a. P 906,000 b. P 921,000 c. P 951,000 d. P 936,000

3. Allowance for doubtful accounts for the fiscal year-ended September 30, 2006 is:
a. P 15,650 b. P 46,800 c. P 45,300 d. P 47,550

4. Merchandise inventory for the fiscal year-ended September 30, 2006 is:
a. P 617,200 b. P 641,200 c. P 677,200 d. P 561,200

5. Book value of the Furniture and Equipment for the fiscal year-ended September 30,
2006 is:
a. P 360,200 b. P 372,200 c. P 375,200 d. P 489,800

6. Goodwill for the fiscal year-ended September 30, 2006 is:


a. P 300,000 b. P 292,500 c. P 285,000 d. P 0

7. Accounts payable for the fiscal year-ended September 30, 2006 is:
a. P 496,000 b. P 536,000 c. P 552,000 d. P 576,000

8. Net income for the fiscal year-ended September 30, 2006 is:
a. P 326,750 b. P 332,750 c. P 346,750 d. P 347,750

9. Retained earnings for the fiscal year-ended September 30, 2006 is:
a. P 252,500 b. P 600,250 c. P 885,250 d. P 900,250

10. Insurance expense for the fiscal year-ended September 30, 2006 is:
a. P 5,400 b. P 9,200 c. P 10,800 d. P 16,200

Solution

1. Accounts Receivable 15,000


Cash 15,000

2. Doubtful Accounts Expense 15,650


Allowance for doubtful accounts 15,650
{5% x (936,000 + 15,000) = 47,550 - 31,900}

3. Merchandise Inventory 601,200


Income Summary 601,200

25
4. Purchases 40,000
Merchandise Inventory 40,000
Accounts Payable 40,000
Income Summary 40,000

5. Income Summary 24,000


Merchandise Inventory 24,000

6. Income Summary 568,900


Merchandise Inventory 568,900

7. Accumulated Depreciation – Fur. & Eqpt. 11,000


Gain on sale of equipment 6,000
Furniture & Equipment 5,000

Cost (P32,000 / 80%) P40,000


Less acc. depr. to date of sale 11,000
(P40,000 x 10% x 2 + (40,000 x 10% x
9/12)
Book value P29,000
Selling price 35,000
Gain on sale of equipment P 6,000

8. Depreciation expense 64,300


Acc. Depr. – Fur. & Equip 64,300

Depr. for year ended 9.30.03


On eqpt sold (40,000 x 10% x 9/12) P 3,000
On remaining eqpt. (613,000 x 10%) 61,300
P64,300

9. Prepaid Insurance 5,400


Insurance expense 5,400

10. Prepaid rent 10,000


Rent expense 10,000

11. Discount on notes payable 3,000


Interest expense 3,000

Total discount P4,000


(100,000 x 12% x 120/360)
Less portion applicable to year ended 9.30. 1,000
Unamortized, 9.30. P3,000

12. Retained Earnings 300,000


Goodwill 300,000

TRANQUILAN CORPORATION
WORKING TRIAL BALANCE
September 30, 2003

Trial Balance Adjustments Income Statement Balance Sheet


Debit Credit Debit Credit Debit Credit Debit Credit
Cash 225,000 15,000 210,000
AR 936,000 15,000 951,000
All. for DA 31,900 15,650 47,550
NR 155,000 155,000
MI 568,900 568,900 617,200 617,200*
F/E 618,000 5,000 613,000
AD– F/E. 187,500 11,000 64,300 240,800

26
Goodwill 300,000 300,000 -0-
AP 536,000 40,000 576,000
NP 100,000 100,000
CS 1,000,000 1,000,000
RE 552,500 300,000 252,500
Sales 3,728,200 3,728,200
Sales R& A 47,600 47,600
Purchases 2,159,300 40,000 2,199,300
Purch R&A. 36,500 36,500
Adv 96,100 96,100
Sales sal 288,500 288,500
Com. exp 152,000 152,000
Misc.sell 29,900 29,900
Rent exp 130,000 10,000 120,000
Office sal 197,200 197,200
Light & W 15,000 15,000
Ins. exp 10,800 5,400 5,400
Tax & licen 47,800 47,800
Misc. Ge 163,400 163,400
Int. exp 41,200 3,000 38,200
Int inc 9,100 9,100
6,181,700 6,181,700

DA 15,650 15,650
Gain 6,000 6,000
Depren 64,300 64,300
Pre ins 5,400 5,400
Pre rent 10,000 10,000
Disc on NP 3,000 3,000
464,350 464,350 4,049,250 4,397,00 2,564,600 2,216,850
0
NET INC 347,750 347,750
4,397,000 4,397,000 2,564,600 2,564,600

ANSWER:
1. B 2. C 3. D 4. A 5. B 6. D 7. D 8. D 9. B 10. A

Problem 10
Your audit client, Tortor Corporation, presents to you the unadjusted trial balance shown
below, which was drawn from its general ledger as at June 30, 2006, the end of its fiscal
year.
TORTOR CORPORATION
Unadjusted Trial Balance
June 30, 2006
Cash 721,800
Trading Securities 200,000
Accounts receivable 2,128,000
Inventory, June 30, 2005 5,194,300
Invest. in associates (Equity Method) 1,200,000
Equipment 1,621,000
Prepaid expenses 116,200
Goodwill 500,000
Accounts payable 2,426,400
Accrued expenses 152,600
Accrued interest payable 226,000
Allowance for bad debts 36,100
Allowance for depreciation 450,700
Loans payable 2,500,000
Capital stock 3,000,000

27
Additional paid-in capital 260,000
Retained earnings 1,808,800
Sales 21,602,000
Interest income 140,000
Purchases 13,928,000
Salaries and wages 3,250,000
Rent, light and water 750,000
Advertising 400,000
Supplies 300,000
Taxes 250,000
Miscellaneous expenses 1,793,300
Interest expense 250,000 _________
32,602,600 32,602,600

Your examination of the accounts disclosed the following information:

1. The cash account included an NSF check returned by the bank on June 30, 2006, but
recorded as a cash reduction in July, 2006, P44,000, and a voucher for suppliers paid in
cash on June 27, 2006 but not entered in the books, P26,500.

2. Marketable Securities which cost P200,000 have a market value of P210,000. Long-
Term Investments have a market value of P1,250,000 as at balance sheet date.

3. The company has been providing an allowance for bad debts at 5% of the
outstanding customers’ balances. Uncollectible accounts were charged off against the
allowance during the year.

4. A physical inventory taken by management personnel of the merchandise stock at


June 30, 2006 totaled P5,751,900. You were unable to observe the inventory-taking as
your services were engaged only on July 15, 2006. Due to the condition of the
accounting records and internal accounting controls, you were also unable to satisfy
yourself as to the inventory.

5. Equipment no longer needed (cost, P150,000; accumulated depreciation, P45,000)


was sold for P100,000 cash on June 29, 2006; the cash proceeds were credited to the
Equipment account. Equipment is depreciated at 10% a year on a monthly basis
computed at year-end.

6. Prepaid expenses included insurance premium of P30,000 paid on April 1, 2006 on a


one-year fire insurance policy.

7. Salaries unpaid as of June 30, 2006, P13,000 were not taken up under accrued
expenses.

8. The Goodwill account was set-up with a credit to Retained Earnings on the basis of a
resolution of the Board of Directors.

9. A 10% cash dividend declared on June 15, 2006, payable on July 31, 2006, has not
been recorded.

10. The Board of Directors approved a resolution on June 25, 2006 appropriating out of
Retained Earnings the amount of P300,000 to meet possible future losses on inventories.

28
Questions
1. Cash for the fiscal year-ended June 30, 2006 is:
a. P 633,800 b. P 651,300 c. P 677,800 d. P 695,300

2. Marketable securities for the fiscal year-ended June 30, 2006 is:
a. P 0 b. P 190,000 c. P 200,000 d. P 210,000

3. Accounts receivable for the fiscal year-ended June 30, 2006 is:
a. P 2,172,000 b. P 2,128,000 c. P 2,100,000 d. P 2,084,000

4. Allowance for doubtful accounts for the fiscal year-ended June 30, 2006 is:
a. P 72,500 b. P 104,200 c. P 106,400 d. P 108,600

5. Inventory for the fiscal year-ended June 30, 2006 is:


a. P 5,751,900 c. P 4,636,700
b. P 5,194,300 d. Cannot be determined.

6. Equipment for the fiscal year-ended June 30, 2006 is:


a. P 1,671,000 b. P 1,571,000 c. P 1,621,000 d. P 1,566,000

7. Accumulated depreciation for the fiscal year-ended June 30, 2006 is:
a. P 390,700 b. P 552,800 c. P 562,800 d. P 622,800

8. Retained earnings before net income for the fiscal year-ended June 30, 2006 is:
a. P 708,800 b. P 1,008,800 c. P 1,308,800 d. P 1,508,000

9. Retained earnings after net income for the fiscal year-ended June 30, 2006 is:
a. P 2,639,700 b. P 2,405,500 c. P 1,840,500 d. P 1,805,500

10. The auditor should issue a(an):


a. Unqualified Opinion c. Qualified Opinion
b. Unqualified Opinion with explanatory paragraph d. Adverse Opinion

Solution

TORTOR CORPORATION
WORKING TRIAL BALANCE
June 30, 2006

Trial Balance Adjustments Income Statement Balance Sheet


Debit Credit Debit Credit Debit Credit Debit Credit
Cash 721,800 70,500 651,300
TS 200,000 10,000 210,000
AR 2,128,000 44,000 2,172,000
Inven. 5,194,300 5,194,300 5,751,900 5,751,900
Invest. Ass. 1,200,000 1,200,000
Equip. 1,621,000 50,000 1,571,000
Prepaid exp. 116,200 7,500 108,700
Goodwill 500,000 500,000 ------------
AP 2,426,400 2,426,400
Acc. Exp. 152,600 13,000 165,600
Acc. int. pay 226,000 226,000
Allow. For 36,100 72,500 108,600
BD
Acc. for 450,700 60,000 172,100 562,800
depr.
Loans 2,500,000 2,500,000

29
payable
Capital stock 3,000,000 3,000,000
APIC 260,000 260,000
RE 1,808,800 500,000
300,000
300,000 708,800
Sales 21,602,000 21,602,000
Int. inc. 140,000 140,000
Purch. 13,928,000 13,928,000
Sal. & wages 3,250,000 13,000 3,263,000
Rent, light … 750,000 750,000

Advertising 400,000 400,000


Supplies 300,000 26,500 326,500
Taxes 250,000 250,000
Mis. exp. 1,793,300 1,793,300
Int. exp. 250,000 250,000
32,602,600 32,602,600
Holding gain 10,000 10,000
BD expense 72,500 72,500
Gain on sale 10,000 10,000
Dep exp 172,100 172,100
Ins. expense 7,500 7,500
Div. payable 300,000 300,000
RE-appro. 300,000 300,000
1,505,600 1,505,600 26,407,200 27,513,900 11,654,900 10,558,200
NET INC. 1,106,700 1,106,700
27,513,900 27,513,900 11,664,900 11,664,900

1. Accounts receivable 44,000


Supplies 26,500
Cash 70,500
2. Trading Securities (Valuation 10,000
Allow.)
Holding gain - TS 10,000
3. Bad debts expense 72,500
Allowance for bad debts 72,500
5% x (2,128,000 + 44,000) =
108,600 - 36,100
4. To be considered in the preparation
of the audit report. Failure to
observe the inventory taking results
in a limitation in the scope of
examination. Depending on the
materiality of the amount of
Inventory in relation to other
accounts, the auditor will either
issue a qualified opinion or
disclaimer of opinion.
5. Allowance for depreciation 60,000
Equipment 50,000
Gain on sale of equipment 10,000
Cost
P150,000
Less acc. depr.
(45,000+15,000)
60,000
Book value P 90,000
Selling price 100,000
Gain P 10,000
Depreciation expense 172,100
Allowance for depreciation 172,100

30
10% x (1,621,000 + 100,000)
6. Insurance expense 7,500
Prepaid expenses 7,500
(30,000 x 3/12)
7. Salaries and wages 13,000
Accrued expenses 13,000
8. Retained earnings 500,000
Goodwill 500,000
9. Retained earnings 300,000
Dividends payable (10% x 300,000
P3,000,000)
10. Retained earnings 300,000
RE Appropriated for Possible 300,000
Losses in Inv.
ANSWER:
1. B 2. C 3. A 4. D 5. A 6. B 7. C 8. A 9. D 10. C

Problem 11
Erasmo Corporation was incorporated on December 1, 2005, and began operations one
week later. Jesus is a nonpublic enterprise. Before closing the books for the fiscal year
ended November 30, 2006, Erasmo Corporation’s controller prepared the following financial
statements:
Balance Sheet
November 30, 2006
ASSETS

Current Assets:
Cash 150,000.00
Marketable securities, at cost 60,000.00
Accounts receivable 450,000.00
Allowance for doubtful accounts (59,000.00)
Inventories 430,000.00
Prepaid insurance 15,000.00
Total current assets 1,046,000.00
Property, plant and equipment 426,000.00
Accumulated depreciation (40,000.00)
Research and developments 120,000.00
Total assets 1,552,000.00

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable & accrued expenses 592,000.00
Income tax payable 224,000.00
Total current liabilities 816,000.00
Stockholders’ Equity
Common stock, P10 par value 400,000.00
Retained earnings 336,000.00
Total stockholders’ Equity 736,000.00
Total liabilities & Stockholders’ Equity 1,552,000.00

Statement of Income
For the year ended November 30, 2006

Net sales 2,950,000.00

31
Cost & expenses:
Cost of sales 1,670,000.00
Selling and Administrative 650,000.00
Depreciation 40,000.00
Research and Development 30,000.00
2,390,000.00
Income before income taxes 560,000.00
Provision for income taxes 224,000.00
Net income 336,000.00

Erasmo is in the process of negotiating a loan for expansion purposes and the bank has
requested audited financial statements. During the course of the audit, the following
additional information was obtained:

1. The investment portfolio consist of short-term investments in marketable equity


securities with a total market valuation of P55,000 as of November 30, 2006.

2. Based on aging of the accounts receivable as of November 30, 2006, it was


estimated that P36,000 of the receivables will be uncollectible. There were no Bad Debt
write-offs during the year.

3. Inventories at November 30, 2006, did not include work in process inventory costing
P12,000 sent to an outside processor on November 29, 2006.

4. A P3,000 insurance premium paid on November 30, 2006, on a policy expiring one year
later was charged insurance expense.

5. On June 1, 2006, a machine purchased for P24,000 was charged to repairs and
maintenance. Erasmo depreciates machines of this type on the straight-line method over
a five year life, with no salvage value, for financial and tax purposes.

6. Research and development costs of P150,000 were incurred in the development of a


patent which Erasmo expects to be granted during the fiscal year ending November 30,
2003. Erasmo initiated a five year amortization of the P150,000 total cost during the
fiscal year ended November 30, 2006.

7. During November 2006, a competitor company filed suit against Erasmo for patent
infringement claiming P200,000 in damages. Erasmo Corporation’s legal counsel believes
that an unfavorable outcome is probable. A reasonable estimate of the court’s award to
the plaintiff is P50,000.

8. The 40% effective tax rate was determined to be appropriate for calculating the
provision for income taxes for the fiscal year ended November 30, 2006. Ignore
computation of deferred income taxes.

Questions
1. In the income statement for the year ended November 30, 2006, Erasmo should report
for the marketable securities
a. A realized loss of P5,000. c. A realized gain of P5,000
b. An unrealized loss of P5,000. d. An unrealized gain of P5,000

2. In the November 30, 2006, balance sheet, Erasmo should report in respect of the
investment portfolio

32
Marketable Securities Valuation Allowance
a. P55,000 P -0-
b. P55,000 P5,000
c. P60,000 P -0-
d. P60,000 P5,000

3. In the November 30, 2006, balance sheet, Erasmo should report the allowance for
doubtful accounts at
a. P23,000 b. P36,000 c. P59,000 d. P69,000

4. Bad debts expense for the year ended November 30, 2006, is
a. P -0- b. P23,000 c. P36,000 d. P59,000

5. Inventories at November 30, 2006, should be reported at


a. P418,000 b. P430,000 c. P442,000 d.P450,000

6. Cost of goods sold for the year ended November 30, 2006, reported as
a. P1,643,000 b. P1,645,000 c. P1,658,000 d. P1,670,00

7. Prepaid insurance at November 30, 2006, should be reported at


a. P -0- b. P12,000 c.P15,000 d. P18,000

8. At November 30, 2006, property, plant and equipment should be reported at


a. P402,000 b. P426,000 c. P447,500 d. P450,000

9. Depreciation expense for the year ended November 30, 2006, should be
reported at
a. P16,000 b. P37,600 c. P40,000 d. P42,400

10. At November 30, 2006, accumulated depreciation should be reported at


a. P37,600 b. P40,000 c. P42,400 d. P44,800

11. In the November 30, 2006 balance sheet, research and development costs
should be reported at
a. P -0- b. P120,000 c. P135,000 d. P150,000

12. Research and development expense for the year ended November 30, 2006 is
a. P -0- b. P15,000 c. P30,000 d. P150,000

13. In the November 30, 2006 balance sheet, Erasmo should report an estimated
liability from lawsuit at
a. P -0- b. P50,000 c. P100,000 d. P200,000

14. For the year ended November 30, 2006, which one of the following adjustments
increases the Unadjusted income, before income taxes of P560,000?
a. Pension expense
b. Work in process inventory at outside processor
c. Estimated loss from lawsuit
d. Research and development cost

15. For the year ended November 30, 2006, which of the following adjustments
decreases the unadjusted income, before income taxes, of P560,000?
a. Recognition of prepaid insurance

33
b. Reduction in allowance for doubtful accounts
c. Depreciation on machine purchased June 1,2006
d. Recognition of research and development cost
Solution

1. Unrealized holding loss 5,000


Valuation allowance 5,000
2. Allowance for bad debts 23,000
S & A Expense (Bad debts) 23,000
3. Inventory 12,000
Cost of sales 12,000
4. Prepaid insurance 3,000
S & A Expense 3,000
5. Property and equipment 24,000
S & A Expense 24,000
Depreciation 2,400
Accum. Depreciation 2,400
6. RD cost – IS 120,000
RD cost – BS 120,000
7. Est. loss on damages 50,000
Est. liab on damages 50,000

ANSWER:
1. B 2. D 3. B 4. C 5. C 6. C 7. D 8. D 9. D 10. C
11. A 12. D 13. B 14. B 15. C

Problem 12
In connection with your audit of the Eddie Vic Farms Corp., the accountant prepared the
following balance sheet:
Eddie Vic Farms Corp.
Balance sheet
December 31, 2006
Assets
Cash P 493,000
Marketable securities 630,000
Accounts receivable 540,000
Inventories 1,002,000
Total current assets 2,665,000
Land, buildings, and equipment 2,904,000
Total assets P5,569,000
Liabilities and Stockholders’ Equity
Accounts payable P 684,840
Estimated losses from future crop failures 670,000
Salaries payable 300,000
Total current liabilities 1,654,840
10% Bonds payable (due in 10 years) 1,050,000
Capital stock 900,000
Retained earnings 1,964,160
Total liabilities and stockholder’s equity P 5,569,000

Additional information:

a. Cash is held in a checking account and a savings account with balances of P130,700 and
P362,300, respectively. The cash in the savings account will be used to support
operations in the event of a crop failure.

34
b. The marketable securities represents the cost of treasury bills with a total market value
of P600,000 at year-end.

c. A loan to the president for P360,000 that is to be repaid in quarterly installments of


P30,000 is included in “Accounts Receivable”. The balance of accounts receivable are
considered to be 95 percent collectible.

d. Inventories include:

Finished products 780,000


Supplies 39,000
Storage buildings (net of P60,960 depreciation) 183,000
Total 1,002,000

e. “Land, buildings, and equipment” includes 5 tractors that were purchased near the end
of the year for P720,000 (shown net of a P600,000, 5-year loan used to buy the
tractors). The balance of the account consists of land that was purchased for
P2,400,000 and buildings that were purchased for P510,000 (shown net of depreciation
of P126,000).

f. Included in “Accounts Payable” are P210,000 of deposits to suppliers for delivery of


goods in February of the next year.

g. The company has 180,000 shares of P5 par common stock issued and outstanding. The
common stock was originally sold for P7 per share, and the premium was included in
“Retained Earnings.”

h. After reading a PAGASA report, the president believes that next year will be a bad crop
year due to prolonged “El Nino” phenomenon and estimates the company will lose about
P670,000. An appropriation of Retained Earnings has been made for this amount.

Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006:

1. Cash
a. P 130,700 b. P 231,600 c. P 362,300 d. P 493,000

2. Accounts receivable
a. P 171,000 b. P 513,000 c. P 531,000 d. P 540,000

3. Current assets
a. P 2,443,000 b. P 2,233,000 c. P 2,080,700 d. P 2,050,700

4. Land, Buildings, and Equipment


a. P 3,873,960 b. P 3,687,000 c. P 3,657,960 d. P 3,087,000

5. Noncurrent assets
a. P 4,409,300 b. P 4,289,300 c. P 4,047,000 d. P 3,927,000

6. Total assets
a. P 6,642,300 b. P 6,490,000 c. P 6,340,000 d. P5,977,700

35
7. Current liabilities
a. P 1,194,840 b. P 1,654,840 c. P 984,840 d. P 774,840

8. Total liabilities
a. P 3,514,840 b. P 2,844,840 c. P 2,634,840 d. P 2,424,840

9. Total retained earnings


a. P 2,265,160 b. P 2,235,160 c. P 1,604,160 d. P 1,595,160

10. Total stockholders’ equity


a. P 3,495,160 b. P 3,797,460 c. P 3,429,160 d. P 2,462,860

Solution
a. Cash – restricted 362,300
Cash 362,300
b. Holding loss 30,000
Allowance for holding loss 30,000
c. Other receivable – noncurrent 360,000
Accounts receivable 360,000
Other receivable – current 120,000
Other receivable – noncurrent 120,000
Bad debts 9,000
Allowance for bad debts 9,000
(180,000 x 5%)
d. Supplies 39,000
Land, building & equipment 183,000
Inventories 222,000
e. Land, building & equipment 600,000
Long-term liability 600,000
f. Advances to suppliers 210,000
Accounts payable 210,000
g. OE: Retained earnings 670,000
Est. liability 670,000
CE: Retained earnings 670,000
Retained earnings – appropriated 670,000
Adj: Estimated liability 670,000
Retained earnings 670,000
Answer:
1. A 2. A 3. D 4. B 5. B
6. C 7. A 8. B 9. B 10. A

Problem 13
M. Senajon hired an attorney to help her start SENAJON REPAIR SERVICE CORPORATION.
On March 1, M. Senajon deposited P11,500 cash in bank account in the name of the
corporation in exchange for 1,150 shares of P10 par value common stock. When he paid the
attorney’s bill of P700, the attorney advised her to hire an accountant to keep his records.
M. Senajon was so busy that it was March 31 before she asked you to straighten out his
records. Your task is to develop the financial statements on the March transactions.

After investing in her business and paying her attorney, M. Senajon borrowed P5,000 from
the bank. She later paid P260, including interest of P60, on this loan. She also purchased a
used pickup truck in the company’s name, paying P2,500 down and financing P7,400. The
first payment on the truck is due April 15. M. Senajon then rented an office and paid three
months’ rent P900, in advance. Credit purchases of office equipment of P800 and repair
tools of P500 must be paid by April 10.

In March,SENAJON REPAIR SERVICE CORPORATION completed repairs of P1,300, of which


P400 were cash transactions. Of the credit transactions, P300 were collected during March.

36
Wages of P450 were paid to employees. On March 31, the company received a P75 bill for
the March utilities expense and a P50 check from a customer for work to be completed in
April.
Questions
1. The Cash balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P12,390 b. P12,315 c. P12,440 d. P11,500

2. The Accounts Receivable balance of SENAJON REPAIR SERVICE CORPORATION at


March 31 is:
a. P900 b. P800 c. P700 d. P600

3. The Total Current Assets of SENAJON REPAIR SERVICE CORPORATION at March 31


is:
a. P13,715 b. P13,565 c. P13,515 d. P13,640

4. The Total Non-current assets of SENAJON REPAIR SERVICE CORPORATION at March


31 is:
a. P11,900 b. P11,888 c. P11,388 d. P11,200

5. The Total Assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is:


a. P25,528 b. P25,415 c. P24,840 d. P24,915

6. The Total Stockholders’ Equity of SENAJON REPAIR SEVICE CORPORATION at March


31 is:
a. P11,215 b. P11,903 c. P(85) d. P(285)

7. The Total Liability of SENAJON REPAIR SERVICE CORPORATION at March 31 is:


a. P16,025 b. P14,725 c. P13,625 d. P6,225

8. The Total Liability and Stockholders’ Equity of SENAJON REPAIR SERVICE


CORPORATION at March 31 is:
a. P25,528 b. P25,415 c. P24,840 d. P24,915

9. The Total Operating expenses and other expenses of SENAJON REPAIR SERVICE
CORPORATION at March 31 is:
a. P1,585 b. P1,035 c. P1,015 d. P897

10. The Net Income of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P415 b. P403 c. P(85) d. P(285)

Solution
Cash 11,500
Common stock 11,500
Pre-operating cost 700
Cash 700
Cash 5,000
Notes payable 5,000
Interest expense 60
Notes payable 200
Cash 260
Equipment 9,900
Cash 2,500
Notes payable 7,400
Rent expense 300
Prepaid rent 600
Cash 900

37
Equipment 800
AP – others 800
Tools 500
Accrued expenses 500

Cash 400
Accounts receivable 900
Revenue 1,300
Cash 300
Accounts receivable 300
Wages 450
Cash 450
Utilities 75
Accrued expenses 75
Cash 50
Advances from customer 50
Answer:
1. C 2. D 3. D 4. D 5. C 6. A 7. C 8. C 9. A 10. D

Problem 14
OMANDAC CORPORATION has just completed its third year of operations, December 31,
2006. The newly selected president was amazed, to say the least, when told that the
“company’s books have never been in balance.” In fact, he has learned that they are
P14,800 out of balance. Consequently, he has decided to ask an independent CPA to “get
things straightened out.” You are the lucky CPA! While getting an overview of the situation
you learn that the bookkeeper journalize and posts all of the daily transactions, but the
adjusting and closing entries are entered directly into the ledger accounts. A worksheet is
not used. After recording the adjusting entries, the bookkeeper prepares an adjusted trial
balance, which is then used to prepare the financial statements.

At your request the bookkeeper prepared the following post-closing trial balance following
his usual procedures:
OMANDAC CORPORATION
Post-closing Trial Balance
December 31, 2006

Cash 17,800
Accounts receivable 55,000
Note receivable 6,000
Merchandise inventory (periodic system) 120,000
Prepaid insurance 2,400
Equipment 240,000
Land (future site) 40,000
Accounts payable 20,000
Income tax payable 10,000
Mortgage payable 100,000
Common stock, par P10 (20,000 shares outstanding) 320,000
Dividends declared and paid 4,000
Retained earnings 50,000
To balance 14,800 _______
Total 500,000 500,000

After spending considerable time digging into the records and files of the company, you
discovered the following:

38
a. Estimates of bad debts expense that total P5,000 have been credited directly to
Accounts Receivable.

b. Accrued interest expense of P4,000 was recorded, but the credit was omitted.

b. Depreciation expense, on a straight-line basis (no residual value), is P30,000 per


year. Depreciation for 2001 and 2002 was credited directly to the asset account.

c. The 2006 ending inventory of P140,000 was not recorded; the beginning inventory
was P120,000.

d. Prepaid insurance of P2,400 was for two full years, 2006 and 2007.

e. Depreciation was not recorded in 2006.

f. Accounts payable of P2,000 were paid, but the debit was not recorded.

g. The common stock account needs scrutiny.

Questions
1. Cash at December 31, 2006 is:
a. P 11,800 b. P 13,800 c. P 15,800 d. P 17,800

2. Accounts receivable at December 31, 2006 is:


a. P 65,000 b. P 60,000 c. P 55,000 d. P 50,000

3. Notes receivable at December 31, 2006 is:


a. P 10,000 b. P 8,000 c. P 6,000 d. P 0

4. Merchandise inventory at December 31, 2006 is:


a. P 260,000 b. P 140,000 c. P 120,000 d. P 110,000

5. Prepaid insurance at December 31, 2006 is:


a. P 2,400 b. P 1,800 c. P 1,200 d. P 0

6. Equipment at December 31, 2006 is:


a. P 210,000 b. P 240,000 c. P 270,000 d. P 300,000

7. Land (future site) at December 31, 2006 is:


a. P 40,000 b. P 30,000 c. P 20,000 d. P 0

8. Accounts payable at December 31, 2006 is:


a. P 22,000 b. P 20,000 c. P 18,000 d. P 16,000

9. Income taxes payable at December 31, 2006 is:


a. P 38,016 b. P 28,016 c. P 10,384 d. P 10,000

10. Mortgage payable at December 31, 2006 is:


a. P 100,000 b. P 95,000 c. P 90,000 d. P 80,000

11. Common stock at December 31, 2006 is:


a. P 320,000 b. P 200,000 c. P 180,000 d. P 120,000

39
14. Retained earnings at December 31, 2006 is:
a. P 50,000 b. P 35,200 c. P 18,000 d. P 24,000

Solution
Cash 17,800
Accounts receivable 60,000
Allowance for bad debts 5,000
Note receivable 6,000
Merchandise inventory 140,000
Prepaid insurance 1,200
Equipment 300,000
Accumulated depreciation 90,000
Land 40,000
Accounts payable 18,000
Interest payable 4,000
Income tax payable 10,000
Mortgage payable 100,000
Common stock 200,000
APIC 120,000
Retained earnings ________ 18,000 squeezed figure
565,000 565,000

Answer
1. D 2. C 3. C 4. B 5. C 6. A 7. A 8. C 9. D 10. A
11. B 12. C

Problem 15
Your new audit client, Capiz Company, prepared the trial balance below as of December 31,
2006. The company started its operations on January 1, 2005. Your examination resulted in
the necessity of applying the adjusting entries indicated in the additional data below.

Capiz Company
TRIAL BALANCE
December 31, 2006

Debits Credits
Cash P510,000
Accounts receivable, net allowance of P20,000 600,000
Inventories, December 31, 2005 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building P19,800
Machinery 444,000
Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000
Bond discounts 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000

40
Premium on common stock 150,000
Stock donation 180,000
Retained earnings, December 31, 2005 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000 _________
P6,000,000 P6,000,000
Additional data are as follows:

(1) The 1,500,000 common stock was issued at a 10 percent premium to the owners of
the land and buildings on December 31, 2004, the date of organization. Stock with a par
value of P180,000 was donated back by the vendors. The following entry was made:

(Debit) Treasury stock P180,000


(Credit) Stock donation P180,000

The stock was donated because the proceeds from its subsequent sale were to be
considered as an allowance on the purchase price of land and buildings in proportion to
their values as first recorded. The treasury stock was sold in 2006 for P75,000, which
was credited to treasury Stock.

(2) On December 31, 2006, a machine costing P15,000 when the business started was
removed. The machine had been depreciated at 10 percent during the first year. The
only entry made was one crediting the Machinery account with its sales price of P6,000.

(3) Depreciation is to be provided on the straight-line basis, as follows: buildings, 2


percent of cost; machinery, 10 percent of cost. Ignore salvage values.

(4) The first mortgage, 6% sinking fund bonds, par value P750,000 will mature in ten
years from January 1, 2005, interest payable April 1 and October 1. The bonds were sold
on January 1, 2005, at 90; the discount is to be amortized over the life of the bonds on
straight-line basis.

(5) A sinking fund is built up on the straight-line basis, with a provision that each
installment after the first shall be decreased y the amount of the annual 6 percent
interest, which interest is to be added to the fund. The audit disclosed that the proper
installment to the sinking fund was paid by the company on December 31, 2006, but
that the amount was charged in error o the firs Mortgage, 6% Sinking Fund Bonds
account.

(6) The trustee of the sinking fund reported an addition of P4,500 interest to the fund on
December 31, 2006. this had not been recorded by the company.

(7) Inventories at December 31, 2006, were P525,000.

Questions
Based on the above and the result of your audit, you are to provide the answers to the
following:

1. The correct balance of Land account as of December 31, 2006 was

41
a. P660,000 b. P630,000 c. P588,000 d. P0

2. The adjusted net book value of the Building as of December 31, 2006 was
a. P 907,200 b. P905,400 c. P950,400 d. P945,000

3. The correct net book value of the machinery as of December 31, 2006 was
a. P399,000 b. P354,000 c. P345,000 d. P348,000

4. The correct amount of total depreciation expense for 2006 was


a. P648,000 b. P63,900 c. P62,400 d. P63,000

5. How much was the gain or loss on sale of machinery on December 31, 2006?
a. P6,000 loss b. P6,000 gain c. P7,500 loss d. P7,500 gain

6. The adjusted net carrying amount of 6% sinking fund bonds as of December 31,
2006 was
a. P675,000 b. P679,500 c. P690,000 d. P735,000

7. The correct balance of sinking fund assets as of December 31, 2006 was:
a. P75,000 b. P79,500 c. P150,000 d. P154,500

8. The correct balance of Treasury Stock as of December 31, 2006 was:


a. P0 b. P105,000 c. P180,000 d. P75,000

9. The correct balance of Common Stock as of December 31, 2006 was:


a. P1,320,000 b. P1,500,000 c. P1,650,000 d. P1,395,000

10. The correct balance of stock donation as of December 31, 2006 was:
a. P180,000 b. P105,000 c. P0 d. P75,000

Solution
1. OE: Treasury stock 180,000
Stock donation 180,000
CE: Memo entry
Adj: Stock donation 180,000
Treasury stock 180,000
---------------------------------------------------------
OE: Cash 75,000
Treasury stock 75,000
CE: Cash 75,000
Land 30,000
Building 45,000
Adj: Treasury stock 75,000
Land 30,000
Building 45,000
2. OE: Cash 6,000
Machinery 6,000
CE: Cash 6,000
Accum. Dep’n 3,000
Loss on sale 6,000
Machinery 15,000
Adj: Accum. Dep’n: mach 3,000
Loss on sale 6,000
Machinery 9,000
3. Depreciation 63,900
Accum. Dep’n – Mach 45,000 *
Accum. dep’n - bldg 18,900

42
* 444,000 + 6,000 – 15,000 x 10% = 45,000
** 990,000 – 45,000 = 945,000 x 2% = 18,900
Accum. Dep’n – bldg 900
Retained earnings 900
4. Discount on bonds 75,000
Sinking fund bonds 75,000
Retained earnings 7,500
Interest expense 7,500
Discount on bonds 15,000
P 75,000/10 yrs = P7,500 – 2002
7,500 – 2003
5. OE: Sinking fund bond 70,500
Cash 70,500
CE: Sinking fund 70,500
Cash 70,500
Adj: Sinking fund 70,500
Sinking fund bond 70,500
6. Sinking fund 4,500
Interest income 4,500
Answer:
1. B 2. A 3. D 4. B 5. A 6. C 7. C 8. A 9. B 10. C

Problem 16

Instructions:
1. Prepare the audit adjustments required in the problems.
2. Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit and
Loss (WPL).
3. Compute the final balances of each account on your WBS and WPL, proceed to the
questionnaires and transfer all answers to the final answer sheet.
4. Assume no other issues, except those discussed on the problem.

On November 20, 2006 you have substantially completed your fieldwork relative to your
audit of RUCHELL Corporation, engaged in the sale of rechargeable lamps. Its rented store
and office is located in Davao City.

Based on your review of the records you have found out that the company’s financial
statements at the end of its fiscal year September 30, 2006 submitted by their account is
subject to the adjustments you noted in your audit.

Audit finding No. 1


Included in the Cash account is a customer’s check for P1,100 deposited on September 30,
2006 but returned by the bank on September 30, 2006 for insufficiency of drawer’s funds.
The check was redeposited on October 3, 2006. No entry was made by the company for the
return nor the redeposit of the check.

Audit finding No. 2


The debit balance of P1,500 in the allowance for bad debts resulted from write-offs of
uncollectible accounts in excess of the beginning balance of the allowance. Further analysis
of the customer’s accounts disclosed the need for setting up an allowance as at September
30, 2006 to 5% of outstanding balance as of date.

Audit finding No. 3


Goods shipped out on consignment basis in September 2006, still unsold as at the end of
the month, were recorded as sales for P4,900 which included 40% gross profit on cost. This
was not included in the physical inventory.

43
Audit finding No. 4
A physical inventory taken of the merchandise on September 30, 2006 amounted to
P41,500.
Audit finding No. 5
Notes receivable included a 120-day 8% for P9,000 dated July 1, 2006 from J. Ramos,
interest due on maturity date (assume 30 days per month).

Audit finding No. 6


Furniture and equipment costing P3,000 acquired on October 1, 2003, and a book value of
P2,400 at September 30, 2005, was sold for P2,000 cash on October 1, 2006. The sales
price was credited to Furniture and Equipment.

Audit finding No. 7


Depreciation for the fiscal year has not been recorded. Estimated life of the furniture and
equipment is 10 years.

Audit finding No. 8


A one-year insurance policy was taken by the company on June 30, 2006 and paid the
annual of P1,200.

Audit finding No. 9


The company paid P11,700 representing rent for 13 months ending on October 31, 2006.

Audit finding No. 10


The 120-day note payable of P6,000, bearing 12% interest was discounted with the bank on
August 15, 2006. Interest expense was debited.

Audit finding No. 11


The excess of P110 issue price over the 100 par value upon sale of 200 shares was credited
to retained earnings.

Audit finding No. 12


Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution
of the Board of Directors.

Audit finding No. 13


Office salaries unpaid as of September 30, 2006, P1,200, were not taken up as accrued
expense.

Audit finding No. 14


Patents were acquired by purchase on September 30, 2005 for P20,000. It has as estimated
useful life of 4 years.

Audit finding No. 15


An analysis of the investment account shows that on September 2006 25 shares were sold
for P200 per share. This was recorded as a debit balance to Cash, P5,000 and a credit to
Investments in A Co., P5,000.

Audit finding No. 16


A repayment of non-interest bearing note payable for P5,000 was erroneously debited to
Advertising.

44
Audit finding No. 17
A payment of P1,000 for Taxes on September 29, 2006 was not recorded in the books.

Audit finding No. 18


On September 30, 2006 RUCHELL Company declared a 10% stock dividend distributable on
October 21, 2006. The market value per share is P120 at the time of declaration. This has
not been taken up in the books.

Audit finding No. 19


On September 30, 2006 a Land was donated by a stockholder. The stockholder bought the
Land in 1998 for P26,000. The appraised value of the land at present is P50,000.

Audit finding No. 20


Marketable Securities which cost P15,000 has a market value of P16,000.

Audit finding No. 21


A payment to supplier within the discount period was made on June 20, 2006. The discount
of P20 was credited to Sales discounts instead of purchase discounts.

Audit finding No. 22


RUCHELL Corporation has a pending lawsuit from a customer, asking for a P100,000
damages. The lawyers of the company believe that it is remote that the case of the
customer will prosper in court.

RUCHELL Corporation
Working Balance Sheet
September 30, 2006

PER AUDIT FINAL


BOOK ADJUSTMENT BALANCES
Current
Cash 10,500
Marketable Securities 15,000
Account Receivable – trade 57,200
Allowance for doubtful accounts 1,500 dr.
Notes Receivable 21,500
Inventories 39,500
Investment in A, Co. –100 shares 25,000
Interest Receivable -
Prepayments 1,750
TOTAL 171,950

Land
Furniture & Equipment 50,850
Accumulated Depreciation (12,170)
TOTAL 38,680

Goodwill 10,000
Patents 20,000
TOTAL 30,000
Total Assets 240,630

45
Liabilities
Accounts payable 35,420
Accrued expenses -
Notes payable 31,000
Stockholders’ equity
Capital Stock, P100 75,000
Additional paid in capital -
Stock dividend distributable -
Donated capital -
Retained Earnings 99,210
Total Liab. & S. E 240,630

RUCHELL CORPORATION
Working Profit and Loss
Year Ended September 30, 2006
PER AUDIT FINAL
BOOKS ADJUSTMENT BALANCES

Sales 269,810
Sales returns ( 1,950)
Sales discounts ( 1,700)
Net sales 266,160

Cost of sales
Inventory, beg. 39,500
Purchases 189,360
Purchase returns ( 3,700)
Purchase discounts ( 1,970)
Inventory, end (41,500)
181,690
Gross Profit 84,470
Advertising ( 7,210)
Doubtful Accounts -
Salesman’s Salaries (21,650)
Miscellaneous Selling expenses ( 1,940)
Rent expense (11,700)
Insurance expense ( 1,200)
Light and water ( 300)
Taxes ( 1,510)
Office salaries ( 3,330)
Miscellaneous office expense ( 1,560)
Loss on sale -
Amortization of Intangibles -
Interest Expense ( 4,060)
Other Income 430
Net Income 30,440

Questions

1. Cash
a. P 9,500 b. P8,400 c. P10,600 d. P5,800

2. Accounts receivable – trade

46
a. P57,200 b. P53,400 c. P50,000 d. P58,300

3. Allowance for doubtful accounts


a. P1,500 b. P2,670 c. P2.860 d. P4,115
4. Interest Receivable
a. P60 b. P180 c. P240 d. 90

5. Inventories
a. P41,500 b. P46,400 c. P45,000 d. 40,000

6. Doubtful accounts
a. P2,980 b. P2,670 c. P4,170 d. P4,000

7. Prepayments
a. P2,980 b. P3,700 c. p2,050 d. P2,650

8. Furniture and Equipment


a. P57,850 b. P62,850 c. P60,850 d. P50,850

9. Depreciation
a. P5,085 b. P6,285 c. P6,085 d. P4.985

10. Accounts payable


a. P35,420 b. P34,420 c. P36,000 d. P32,988

11. Capital Stock


a. P75,000 b. P77,000 c. P0 d. P73,000

12. Sales
a. P269,810 b. P274,710 c. P264,910 d. P260,100

13. Purchases
a. P189,360 b. P187,360 c. P180,000 d. P200,160

14. Interest expense


a. P4,030 b. P4.060 c. P4,090 d. P3,910

15. Other Income


P430 b. P610 c. P400 d. 0

16. Goodwill
a. P0 b. P10,000 c. P5,000 d. P6,000

17. Office salaries


a. P2,130 b. P22,850 c. P4,530 d. P1,200

18. Patents
a. P0 b. P10,000 c. P15,000 d. P5,000

19. Additional Paid in Capital


a. P3,500 b. P500 c. P2,000 d. P200

20. Investment in a Co.

47
a. P0 b. P26,000 c. P24,000 d. P25,000

21. Advertising
a. P7,210 b. P5,210 c. P2,210 d. P5,000
22. Light and Power
a. P500 b. P5,300 c. P300 d. P0

23. Taxes
a. P1,970 b. P2,510 c. P1,000 d. P300

24. RUCHELL Company should record stock dividend payable at


a. P7,500 b. P9,000 c. P0 d. P1,500

25. Land
a. P0 b. P50,000 c. p26,000 d. P24,000

26. The appropriate account to be credited for the donation is


a. Retained Earnings c. Donated Capital
b. Capital Stock d. Other Income

27. Marketable securities, net of any allowance for decline


a. P14,000 b. P15,000 c. P16,000 d. P0

28. Sales discount


a. P1,680 b. P1,720 c. P1,200 d. P1,500

29. Salesman’s salaries


a. P21,650 b. P22,850 c. P20,000 d. P25,000

30. RUCHELL Company should recognize liability from damages for


a. P0 b. P100,000 c. P50,000 d.P200,000

Answer:
1. B 2. B 3. B 4. B 5. C 6. C 7. B 8. D 9. A 10. A
11. A 12. C 13. A 14. D 15. B 16. A 17. C 18. C 19. A 20. C
21. C 22. C 23. B 24. A 25. B 26. C 27. B 28. B 29. A 30. A

Entries:
Finding 1 Finding 8
Accounts receivable 1,100 Prepayments 900
Cash 1,100 Insurance expense 900
Finding 2 Finding 9
Bad debts 4,170 Prepayments 900
Allow. For BD 4,170 Rent expense 900
Finding 3 Finding 10
Sales 4,900 Prepayment 150
Accounts receivable 4,900 Interest expense 150
Inventory 3,500 Finding 11
COS 3,500 Retained earnings 2,000
Finding 4 APIC 2,000
COS 39,500 Finding 12
Inventory 39,500 Retained earnings 10,000
Inventory 41,500 Goodwill 10,000
COS 41,500 Finding 13
Finding 5 Office salaries 1,200
Interest receivable 180 Accrued expenses 1,200
Interest income 180 Finding 14
Finding 6 Amortization 5,000

48
No adjustments Patents 5,000
Finding 7
Depreciation 5,085
AD 5,085

Finding 15 Finding 18
Loss on sale 1,000 Retained earnings 9,000
Investment 1,000 Stock div. distr. 7,500
Finding 16 APIC 1,500
Note payable 5,000 Finding 19
Advertising 5,000 Land 50,000
Donated capital 50,000
Finding 17
Taxes 1,000 Finding 20
Cash 1,000 No adjustment
Finding 21
Sales discount 20
Purchase discount 20

WORKING PAPER
Per books Per audit
2,100.0
Cash 10,500.00 0 8,400.00
Marketable securities 15,000.00 15,000.00
1,100.0 4,900.0
Accounts receivable - trade 57,200.00 0 0 53,400.00
4,170.0 (2,670.0
Allow.for bd - debit balance 1,500.00 0 0)
Notes receivable 21,500.00 21,500.00
45,000.0 39,500.0
Inventories 39,500.00 0 0 45,000.00
1,000.0
Investment in A. Co. - 100 shares 25,000.00 0 24,000.00
Interest receivable - 180.00 180.00
1,950.0
Prepayments 1,750.00 0 3,700.00
50,000.0
Land - 0 50,000.00
Furniture & Equipment 50,850.00 50,850.00
(12,170.0 5,085.0 (17,255.0
Accumulated depreciation 0) 0 0)
10,000.0
Goodwill 10,000.00 0 -
5,000.0
Patents 20,000.00 0 15,000.00
240,630.0 267,105.0
0 0

Accounts payable 35,420.00 35,420.00


1,200.0
Accrued expenses - 0 1,200.00
5,000.0
Notes payable 31,000.00 0 26,000.00
Capital stock, P100 75,000.00 75,000.00
3,500.0
Additional paid in capital - 0 3,500.00
7,500.0
Stock dividend distributable - 0 7,500.00
50,000.0
Donated capital - 0 50,000.00
Retained earnings 99,210.00 68,485.00
240,630.0 267,105.0
0 0

49
4,900.0
Sales 269,810.00 0 264,910.00
(1,950.0 (1,950.0
Sales returns 0) 0)
(1,700.0 (1,720.0
Sales discounts 0) 20.00 0)
Net sales 266,160.00 261,240.00
39,500.0
Cost of sales *** 181,690.00 0 20.00
41,500.0
0
3,500.0
0 176,170.00
Gross profit 84,470.00 85,070.00
Other income 430.00 180.00 610.00
TOTAL 84,900.00 85,680.00
Operating expenses
(7,210.0 5,000.0 (2,210.0
Advertising 0) 0 0)
4,170.0 (4,170.0
Doubtful accounts - 0 0)
(21,650.0 (21,650.0
Salesmen's salaries 0) 0)
(1,940.0 (1,940.0
Miscellaneous selling expenses 0) 0)
(11,700.0 (10,800.0
Rent expenses 0) 900.00 0)
(1,200.0 (300.00
Insurance expense 0) 900.00 )
(300.00 (300.00
Light and water ) )
(1,510.0 1,000.0 (2,510.0
Taxes 0) 0 0)
(3,330.0 1,200.0 (4,530.0
Office salaries 0) 0 0)
(1,560.0 (1,560.0
Miscellaneous office expenses 0) 0)
1,000.0 (1,000.0
Loss on sale - 0 0)
5,085.0 (5,085.0
Depreciation - 0 0)
5,000.0 (5,000.0
Amortization of intangibles - 0 0)
Income from operations 34,500.00 24,625.00
(4,060.0 (3,910.0
Interest expense 0) 150.00 0)
Net income 30,440.00 20,715.00
12,000.0
Retained beginning 68,770.00 0 56,770.00
9,000.0 (9,000.0
Dividends - 0 0)
Retained end 99,210.00 68,485.00
186,105.0 186,105.0
0 0
*** COS
Inventory - beg. 39,500.00
Purchases 189,360.00
(3,700.0
Purchase returns 0)
Purchase discounts (1,970.0

50
0)
TGAS 223,190.00
(41,500.0
Inventory - end 0)
COS 181,690.00

51